1. MIS 3090 IT for Financial Services
Alternative Trading Systems (ATS)
and
Electronic Communications Networks (ECN)
Please use this space for making ANNOTATIONS or for adding comments to individual slides.

2. Definition
An Alternative Trading System (ATS) is a networked application that connects potential buyers and sellers of securities electronically, and matches trades that meet predefined criteria.
An Electronic Communications Network (ECN) is an ATS that has been registered with the SEC as either a broker/dealer or an exchange.
Broker/dealer = (integrated into NASDAQ)
Exchange = (Arca|Ex)
Class Question: What’s the added benefit of registering as an exchange?

3. Examples of ECNs
Class Question: Consolidation is taking place (why do you think this is?)

4. Vol. distribution - NYSE listed stocks
Slide based on presentation by Prof. Ingrid M. Werner, Ohio State University
Vol. distribution - NYSE listed stocks
October 2003
Single-counted, share volume
Internal matches only
All hours
Excluding ETFs
Seeing through Nasdaq InterMarket
The last morning report of the year.
Source: Goldman Sachs Trading & Market Structure Analysis

5. Vol. distribution – Nasdaq stocks
Slide based on presentation by Prof. Ingrid M. Werner, Ohio State University
Vol. distribution – Nasdaq stocks
Share volume
Single-counted
Internal matches only
All hours
Excluding ETFs
October 2003
Mostly broker-dealer upstairs trades
But also small activity on:
Brut
NexTrade
MarketXT
Attain
TradeBook
Other ATSs
2 to 5 percent?
Source: Goldman Sachs, Trading & Market Structure Analysis

6. Click here to play Video

7. Trade through Rule (TTR)
Based on article by Theresa Carey in eWeek
Trade through Rule (TTR)
Instituted in 1975, the TTR was designed to make sure investors got the best available price for their stock trade.
The TTR means that if you place an order and the best quote is with a specialist on the floor of the NYSE, then your broker is required to route your order there
Applies only to NYSE stocks since a MM would match the best price on a NASDAQ stock without having to route the order to that MM offering the best price
While a quote on a NASDAQ stock is executable, a quote on an NYSE stock is an indication and not a firm quote.
Specialists are allowed to hold an order for 30 seconds before either executing it or handing it off to another specialist—and during that time, the price may change.
NASDAQ members charge NYSE specialists with bait-and-switch pricing tactics so that orders are routed to the NYSE, then executed at a worse price than was available at the time the order was entered.

8. Clearing Mechanisms
After a trade takes place (i.e., becomes locked-in), then what?
There must be an exchange of cash for securities
Third parties offer clearing/settlement services
Possibility of self-clearing (e.g., Raymond James)
Why is this a potential benefit?
Fee for service charged back to broker
Trades clear in 3 days (T+3)
Stock borrowing in the interim
Buyer
Seller
Exch.
Securities
Funds
Securities
Funds
Clearing

9. SIAC (subsidiary of NYSE)
When the financial markets close, SIAC’s computers keep going, processing, on behalf of the Depository Trust & Clearing Corporation (DTCC) and its affiliates, nearly 100 percent of the equities and fixed income securities traded in the U.S. each day.
SIAC’s Shared Data Center alone is linked to the securities industry by more than a thousand communication lines over which an average of 70 billion bytes of data are transmitted daily.
SIAC plans, develops, implements and manages a variety of automated information-handling and communications systems. These systems support order processing, trading, market data reporting, trade comparison, surveillance, clearance and settlement for a broad range of securities.

10. Secure Financial Transaction Infrastructure
SIAC's Secure Financial Transaction Infrastructures is a high capacity infrastructure that improves the overall resilience of the financial industry's data communications connectivity. This highly reliable infrastructure offers firms access to the trading, clearing and settlement, market data distribution and other services SIAC provides on behalf of most of the U.S. securities industry's exchanges and utilities.
SFTI is a national solution that all members of the financial community can utilize. SFTI currently offers local connectivity to firms in the Northeast, Midwest and New England, with plans to expand to other areas of the country as the market demands.
Actively expanding in Europe, Asia, Middle East to be global backbone for securities industry

11. Class Question: What are some risks associated with this program?
Stock Borrowing
The Continuous Net Settlement (CNS) System is an automated book-entry accounting system that centralizes the settlement of compared security transactions and maintains an orderly flow of security and money balances.
The Stock Borrow Program allows participants to lend NSCC (National Securities Clearing Corp.) available stocks and fixed income securities from their account at The Depository Trust Co., to cover temporary shortfalls in the CNS System. NSCC credits members' accounts with the full market value of securities borrowed, and members can earn overnight interest on that value by investing the funds.
Class Question: What are some risks associated with this program?

12. Block Trading The “Napster” of Trading
Strictly sold to the buy-side – suitable for large blocks
Launched in with 38 members
currently has 273 members with $6.66 trillion in equity assets
Average trade size is 47,000 shares
Traded $11.5 billion of NYSE equities in first year
Quantity discovery, not price discovery
facilitates negotiation of price
Check out Liquidnet: news and stats

13. ETFs, VIPERS & SPDRs Different from Mutual Funds (buy/sell at NAV)
Trade directly on exchanges during the day
Lower expense ratios than with most mutual funds
Tax implications
Barclay’s iShares traded on AMEX
VIPERS are Vanguards ETF, similar to iShares
SPDR – benchmark S&P 500, 9 sector SPDRs
QQQ – Nasdaq 100

15. For Next Class… Read Check out www.liquidnet.com for next class
Slides on Optimark
Assigned readings on schedule page